Inclusionary zoning has yielded nothing but failure

In the Bay Area it is “Affordable Housing Week,” comprised of events aimed at raising awareness and educating area citizens about the problem of rising housing costs.

It’s a great opportunity for constructive dialogue regarding the many problems currently being faced by families entering the Northern California housing market.

Yet many will no doubt use this week to boost affordable housing mandates, which are more prevalent in the Bay Area than in any other part of the state. These typically take the form of inclusionary zoning policies, which require developers to sell a certain percentage of their properties at prices well below what the market demands.

It all sounds very reasonable, at least at first blush. Developers sell for less, and buyers buy for less. What could be simpler or more effective?

Alas, these policies have yielded nothing but failure – and worse.

Despite the widespread implementation of inclusionary zoning, home prices in the Bay Area have become astronomical. The California Association of Realtors recently reported that a mere 21% of Bay Area residents can currently afford a median-priced home.

Today, in fact, the Bay Area is notorious for being the most expensive place to live in the entire country.

To make matters worse, home prices are still climbing. Although the increases have largely been modest, housing in the Vallejo-Napa corridor has risen by a staggering 12% since last year. Santa Rosa has risen by 9.9%.

Nationwide, on the other hand, housing affordability has been improving. Average home prices actually declined in the first quarter of 2004. According to David Lereah, Chief Economist for the National Association of Realtors, “most of households in the United States can readily afford a typical home.”

But that’s not the case for the Bay Area, and misguided government intervention is largely to blame.

A report released this April from the Reason Foundation found that the 45 cities in the San Francisco Bay Area with affordable housing mandates in place are actually losing approximately 2,300 homes to inclusionary zoning each year. This has increased median home prices by a staggering $22,000 to $44,000 in most areas, with some cities experiencing price increases of more than $100,000.

Moreover, upwards of $553 million in local tax revenue is lost each year, because inclusionary zoning dramatically reduces the accessed value of the homes that fall within its purview.

This occurs because inclusionary zoning, for all its good intentions, is still a distortion of basic market forces, and as Newton’s third law states: “For every action, there is an equal and opposite reaction.”

The “equal and opposite reaction” in this case is the passing on of costs from low-income homebuyers who purchase properties regulated by inclusionary zoning to virtually everybody else concerned.

The costs don’t disappear; they’re merely shifted around.

In your average city, inclusionary zoning costs homebuilders $45 million a year, since they are forced to sell at below-market prices. As a result, homebuilding becomes less profitable, and they elect to build fewer homes. This trickles down to the rest of society.

Homebuyers pay far more on average because fewer homes are built. Realtors lose money because there’s less real estate to sell. Public services suffer because of the resulting decreases in tax revenue.

The only “winner” here, then, is the person who buys a home whose price is regulated. Everybody else pays, but they just don’t know about it. That’s why inclusionary zoning is often referred to by economists as an “implicit tax.”

And since inclusionary zoning fails to keep up with the demand for low-income housing, most poor families end up paying more, along with every other homebuyer. Accordingly, inclusionary zoning hurts precisely those whom it is intended to help.

That’s what happens when the government steps in. Instead of solving the problem, it only makes it worse.

Rather than focusing on what the government can do, “Affordable Housing Week” ought to emphasize what good can come from the unfettered market. If there’s anything free enterprise does well, it’s keeping costs low. The less the government regulates, the lower housing prices in the Bay Area will be.

Still, there is no silver bullet for high housing costs, and finding one should not be the point of “Affordable Housing Week.” For in the end, what is billed as a panacea is usually no solution at all.

Owen Courrègesis a research fellow in urban and land use policy at the Reason Foundation